The HSBC of today is a fundamentally different organisation from the one that made those mistakes,

WASHINGTON — The Justice Department on Tuesday alleged that British bank HSBC violated the Bank Secrecy Act in connection with the laundering of money from narcotics drug traffickers in Mexico and intentionally allowed prohibited transactions with Iran and other nations that have been under sanctions.

In court papers filed in federal court in the New York City borough of Brooklyn, the federal government said the case against HSBC is related to the laundering of proceeds from narcotics trafficking via the Black Market Peso Exchange — a method by which money launderers convert cash narcotics dollars into Colombian pesos by buying and reselling wholesale consumer goods.

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“The lack of an effective anti-money laundering program at HSBC Mexico and HSBC Bank USA, N.A. contributed to the conduct charged” in the money-laundering case against narcotics traffickers, Justice Department prosecutors said in a court filing.

The government alleges that HSBC intentionally allowed prohibited transactions with Iran, Libya, Sudan and Burma. The federal government also said the bank facilitated transactions with Cuba in violation of the Trading With the Enemy Act.

The documents say the prohibited transactions with Iran, Libya, Sudan and Burma took place from 2001 through 2006.

The government’s allegations come as HSBC says it has agreed to pay a record $1.9 billion to settle the U.S. money-laundering probe. The move avoids a legal battle that could further savage the bank’s reputation and undermine confidence in the global banking system.

HSBC admitted to a breakdown of controls and apologized in a statement on Tuesday.

“We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organisation from the one that made those mistakes,” said Chief Executive Stuart Gulliver.

“Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters.”

HSBC on Tuesday said it expected to also reach a settlement with British watchdog the Financial Services Authority. The FSA declined to comment.

U.S. and European banks have now agreed to settlements with U.S. regulators totalling some US$5 billion in recent years on charges they violated U.S. sanctions and failed to police potentially illicit transactions.

No bank or bank executives, however, have been indicted, as prosecutors have instead used deferred prosecutions – under which criminal charges against a firm are set aside if it agrees to conditions such as paying fines and changing behaviour.

HSBC’s settlement also includes agreements or consent orders with the Manhattan district attorney, the Federal Reserve and three U.S. Treasury Department units: the Office of Foreign Assets Control, the Comptroller of the Currency and the Financial Crimes Enforcement Network.

HSBC said it would pay US$1.921 billion, continue to cooperate fully with regulatory and law enforcement authorities and take further action to strengthen its compliance policies and procedures. U.S. prosecutors have agreed to defer or forgo prosecution.

The settlement is the third time in a decade that HSBC has been penalized for lax controls and ordered by U.S. authorities to better monitor suspicious transactions. Directives by regulators to improve oversight came in 2003 and again in 2010.

Last month, HSBC told investors it had set aside US$1.5 billion to cover fines or penalties stemming from the inquiry and warned costs could be significantly higher.

Analyst Jim Antos of Mizuho Securities said the settlement costs were “trivial” in terms of the company’s book value.

“But in terms of real cash terms, that’s a huge fine to pay,” said Antos, who rates HSBC a “buy”.

HSBC shares dipped 0.3% in early London trading to 639 pence, in line with a slightly weaker European bank index . Its Hong Kong stock nudged up 0.3% to HK$79.70.

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